Libya vs Goldman Sachs – the secret memo

Last month Goldman Sachs filed papers in the UK courts seeking to have a case for mis-selling brought by the Libyan Investment Authority summarily dismissed. This is not the first attempt by the bank to end the problems caused by its engagement with Gaddafi-era Libya. In a 2010 memo, Goldman proposed a complex structure that would have involved a $52 million payment in exchange for unwinding trades that had cost the Libyan fund almost $1.3 billion. While the US investigates, LIA chairman Abdulmagid Breish is making plans for the sovereign wealth fund’s future – and he wants his country’s money back.

There are recruitment adverts out at the
Libyan Investment Authority. Libya’s sovereign
wealth fund, seeking to regain direction after the
country’s revolution, has employed consultants for
a few key roles. There’s the CEO. And the CFO. And
the chief investment officer.

And the head of risk, the
head of internal audit, and the chief operating officer.

Oh, and the deputy CEO. And
the head of legal.

There are revamps, and then
there’s the LIA. Founded by Muammar
Gaddafi’s second son, Saif Al Islam Gaddafi, in
2006, the fund has already gone through more drama and upheaval
than most of its
sovereign wealth peers have endured in their combined
history.

Waves of executives and managers have come and gone, foreign
banks and fund managers have sold it extraordinary duds that
soured during the financial crisis, the country has undergone
painful revolution during which Saif was jailed and his father
killed, its funds have been frozen by the UN (and remain so, at
the fund’s own insistence, today) and at the end
of it all it finds itself with a glut of legacy headaches and
an empty management bench.

Now, as it seeks to move forward, it must also look back.
This year it has launched litigation against some of the
biggest names in global banking, seeking to recover billions of
dollars for deals those banks put the LIA into during the
Gaddafi regime. And no matter how much Libyan executives seek
to paint themselves as a breath of fresh air, correcting the
sins of the past, they must inevitably face scrutiny for just
what their role in the bad old days really was.

Breish has plenty of ideas for the future, but this year
he’s been in the news for taking on the
transgressions of the past, launching litigation to claim more
than $2.5 billion from Goldman Sachs and
Société Générale for
instruments those banks sold to the LIA between 2007 and
2009.

Today, flanked by a lawyer who never feels a need to rein
him in, Breish is adamant the LIA is in the right on both
cases. On Goldman – a case that rests on demonstrating
that Goldman abused the trust it had built with the fledgling
and somewhat wide-eyed sovereign fund, selling structures that
its officials could not understand – he says: "It was
very clear and evident that there was a breach in trust. They
abused that confidence that was built, and the inexperience of
individuals.

"I wouldn’t
say it was a con job, but it was very near to it, where people
were taken on holidays and bought gifts and things. The trust
element was there and they totally took advantage of it and
sold LIA complicated transactions with complicated documents
that they couldn’t understand, at a moment when
the whole world was going south, and they knew that."

Goldman Sachs, which has
applied for summary dismissal of the case before trial, tells
Euromoney: "We think the claims are without merit, and we will
defend them vigorously."

The
Société Générale case is less
about mis-selling and more about over $58 million of payments
the French bank made to a third party called Leinada, a
Panama-registered vehicle owned by a man called Walid Al-Giahmi
who was close to the Gaddafi regime – payments that
the lawsuit describes as bribes.

"Then, SocGen did not
disclose how much was being paid. They did not disclose the
identity. It was like pulling teeth. Only months and months
later we found out what was going on. SocGen itself was one of
the prime banks in the world, at the forefront of derivatives
trading. They bring in a party who is not even literate in
financial affairs to advise them on structures and derivatives?
Hard to understand."

Société Générale tells Euromoney
the allegations are unsubstantiated and says it "works
occasionally with financial intermediaries in countries where
it does not have local teams in place".

One can’t
fault the LIA for boldness, but some are puzzled that this
claim should be heading for court at all. The
LIA’s legal representatives in the cases are Enyo
Law, specifically partner Simon Twigden, who is considered a
lawyer of the highest calibre; but look what he and his client
are up against: the most powerful bank in the US and all its
Wall Street legal advisers (although, these being London-heard
cases, both Goldman and Société
Générale are being represented by Herbert Smith).
Many observers think the Goldman litigation in particular has
no realistic chance of success. Did the LIA try to negotiate
first?

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